Wednesday, October 19, 2005

Signaling and the Scam School

The whole IIPM brouhaha raises an interesting question: does the existence of a scam school mean that a free market isn’t working? Does the government have to regulate schools to make sure they are not bogus?

I believe markets a self-regulating to a large extent. Parents and students will have a strong incentive to do good research on any educational institution before attending. We would expect that a scam school would lose students over time and eventually fail. I will add that making demonstrably false claims in newspaper advertisements could and should be considered fraud, and the government has a role to enforce these laws.

However I had another completely different thought; one that might bother some people if they took it too seriously. The idea is that maybe scam schools provide a service by sorting students into different quality categories.

The idea is related to Michael Spence and his Nobel-prize winning idea that education is partly a labor market signal. Imagine that unlike engineering, an MBA really doesn’t impart any useful skills (which is possible). Maybe running a business is mostly common sense. But who has common sense? It isn’t at all common. The idea of “signaling” is that an MBA reveals inner qualities of the students such as common sense and organization that are useful in running a portion of a business. Therefore, those who do well in a reputable business school “signal” their abilities and can command a higher salary than other people of equal - but hidden - ability. They earn more because everyone knows that they are special.

Now maybe there is a role for an institution to signal the other end of the ability spectrum. Suppose there are many people who are bright and engaging and somehow lack all common sense. These people might like to run an office but lack the ability to do so. This is the problem: how do managers know before putting someone in a position of responsibility that someone will do more harm than good? Wouldn’t it be nice if foolish people somehow acquired negative signals that could tip off the manager that this person is exactly the wrong type of person to run a business?

So the scam school enters the picture. It advertises heavily with obviously inflated claims. On its website you see lots of things that make you suspicious: no faculty list, unclear course description, inflated claims, etc. Anyone with common sense would avoid such a school. But some people will go there. Those people will list the school on their resumes and managers will know whom not to hire. Perhaps, over time, some of these people will guess that their “business school” experience is more of a handicap than an asset, but the lack of common sense that lead them to this school will prevent them from really understand this.

These signals are useful in the labor market because they allow for better sorting between people and tasks. People without good business sense will not run businesses, and this will save companies from costly mistakes.

Here is an excerpt from Chandrachoodran’s blog about his experience with the infamous IIPM. He applied there and felt that he had done poorly in the interview and in the examination, but he was offered a spot and told to make an immediate decision to accept or refuse.

I refused. Next day, somebody calls me up and gives me a lecture on how IIPM education is valid world-wide and why I should quit my current job (I was a trainee writer in an agency) and improve myself. Of course, they would also be willing to let me pay my fees in two installments.

Reason prevailed and I continued being a trainee writer, going on to become a respected member of that organisation.

Now, I say this for two reasons. One. IIPM is as much interested in transparency as the Playboy reader is in the stories.

Second is that that incident told me that IIPM is not worried about their student’s academic merit and talent. They just want him/her in. I say this for I know I was never MBA material. One, my CAT score that year wasn’t encouraging. (My Quant score was to blame - I ain’t an expert in math). SO I am not sure how well I would have performed in the IIPM test.

Two, my contribution to that GD was zilch. I remember this well. For I am not a follower of cricket and wouldn’t know what globe changing effects a match between India and Pakistan would have.

I say this without hesitation. I would have sucked big time in an MBA course. I don’t have the ruthlessness that I see in friends who are at IIMA and ISB. I do know I am clever and creative. But that doesn’t translate to being a good MBA student. And I am sure, IIPM would have known it. Yet, they wanted me to join their course.

Why? Simply put. Rs. 7 lakhs or whatever their course fee is.

I have been viewing everything IIPM does since that day with a suspicious eye. And my doubts have been proved.

Chandrachoodran had the sense to know that he really wasn’t MBA material but some people don’t know that. They end up going to the scam school and acquiring a worthless degree.

But if there are foolish students who attend scam school, aren’t there foolish managers who might hire them? Indeed there might be. But these managers are probably foolish in many dimensions and will almost surely run their businesses into the ground over time. If they are allowed the opportunity to make a foolish choice in hiring a person to run a particular operation, he will hasten the demise of his business. This means that resources that were trapped in an inefficient operation would be freed to go to more efficient operations.

But if there are foolish graduates who go to work for foolish managers, might there not be foolish consumers who buy their products? Indeed. An economy of fools would not work so well.

Interesting post. The problem though is ultimately, it leads to the institute, which is the root of the evil, to profit regardless of it being an inferior one, and the student, who gets robbed. So basically, following the free market analogy, the institute keeps raking in more and more money, ultimately managing to overshadow it's uselessness with enough advertizing (as in the case of IIPM)that it's image actually changes from being useless to being an institute of repute. To me it looks like a free market meltdown where the bad guys keep on prospering, and the good (but stupid) guys keep on getting screwed.

I don't think it is a issue of inferior institute making a profit. The "inferior" concept is relative and we should let the consumer decide.

However, issue of fraud is completely different. It may not always require government involvement in terms of regulation. A functional civil justice system can easily handle that. Something on the lines of class-action law suit will go a long way here.

In a very strange way, the IIPM episode shows what happens when people spend other's money. How many of the students attending IIPM were paying the fees using their own hard-earned money? Most likely it was their parents money. If you had worked your ass-off and wanted to do a MBA wouldn't you bother to do a basic background check before paying tons of money?

Ashish makes a good point regards who exactly is paying those exhorbitant fees. I understand that most students at IIPM (told by an anonymous IIPM-ian on my blog)hail from small-business families for whom it is enough solace that their ward is a MBA graduate. The school doesn't matter. IIPM has tapped into that market and making enough dough to advertise heavily. Now, they made the mistake of bringing IIM comparison into the picture. This will definitely draw the ire of reputed business schools who see themselves being dragged down to IIPM levels.

A foolish economy, as you end this post with, might work for the fools involved but it may have a spillover effect for the society at last. Are those costs accounted for?

On the burning laptops by IIPM students - I remember reading in one of the blogs that if this is the "management" what they learn inside IIPM walls. And for people who pay Rs.7 lacs as fees, thinkpads are not a costly thing to burn. Deepawali is around the corner anyway.

There are many institutes like IIPM. And there are even more people who are willing to pay for the "MBA" degree from "reputed" institutes. It's a business, thriving like a vegetable market. There are fixed rates for college degrees.

Oh, and by the way, the same IIPM advertisement, now famous for its "free Europe tour" and "free laptops" lines, continues in the print media. I noticed it just yesterday.

Yadu: Hi and thanks for the nice words. I will remember to add you to my very long blogroll someday (hopefully before I forget)

Gawker: I think the point of the post is to show that we all have a role to play in making a free market effective and the role of students is to shop around carefully just like a consumer does. Institutions like IIPM exist because parents and students are being choosy shoppers and are getting ripped off. It is a pity, but I would feel more sorry for them if they were aspiring artists than aspiring business leaders.

Ashish: The students should care if they are wasting their parents money (although come to think about it, I did do much better when I was paying my own tuition. I wonder why...) But parents should care that their money is spent on a good education for their children. I know that I will be very motivated when my son starts looking for colleges. I am already thinking a bit about it and he's only 7!

Patrix: Indeed that must be what IIPM offers: just a piece of paper that pleases the parents for some reason. But I would think they would make much more money if they tried to fill the need of providing quality MBA degrees that have genuine market power.

A market of fools doesn't work too well for anyone. We all need to do our part to make sure that we make good decisions in the market place, especially on the big-ticket items.

What about the "branding" effect? IIPM is obviously spending so much on ads to create a brand. Current students (who may know that it's not a really great school) have an incentive to perpetuate the myth because their future depends on it.

If IIPM successfully creates a "brand" thru its ads then students who are good (academically) will go there because of the brand identity. The companies (some of whom may be coming because of the brand identity) will hire these good students. Then it will be self perpetuating. The brand will attract more and better students and more companies to hire them.

The brand identity and its creation thus seems to be the main purpose behind all the ads. After some years it may be successful unless the fraud is exposed before a brand identity is created.

Another excellent post on the IIPM saga...but one thing Michael has missed out on is the word 'DESPERATION'. And another word 'STATUS'. Thats what motivates parents and their wards in India. They read the stories in the Times of India and Indian Express about how IIM grads get job offers of $100,000 , and about a certain relative whose son got an MBA degree and a subsequent dowry of 50 lakhs.....they become 'foolish'...and take decisions which are obviously in violation of their 'common sense'...Just like a moth drawn to the flame. 2 words - 'SOCIETAL PRESSURE'.

Lastly a stat - only 2500 decent MBA seats available in India , and 350,000 aspirants.

Michael,Great post. Firstly, thanks for taking up my threadSecondly, market regulation may not work for educational institutions for demand far outstrips supply, especially in India, creating an imbalance. Sellers decide what they want to sell and how. IIPM managed to latch on this and "build" their brand.

Transmorgifier raises an interesting point. that of brand building - well, i think that is a valid point and in fact a plausible scenario. But that to me is only a short term outcome. Possibly in the next 5-6 years, if our current movement doesn't achieve anything, IIPM might become an "institute of repute" and manage to attract talent. But if they fail to keep up with the promise, their advertising only will kill their own product, as David Ogilvy said

I was inspired to write a post about advertising poor quality products: When it Pays to Advertise.

Transmo: The brand effect really only works for quality products. IIPM isn't a brand in any sense and probably never will be. IIM is a brand. Reputation builds a brand. Advertising can help to solidify that reputation but there must be something genuine at the core.

Ravages: I think that your quote of Ogilvy is apt: Advertizing kills a bad product faster. It will probably undo IIPM now. They are getting a lot of bad word of mouth now. They were much better off when they were kind of unknown.

Raj: Indeed, the extreme shortage of quality business schools is an important fact here. I believe that IIPM could have made much more money if they had strived to be a legit school. There is a need for second tier B-schools and someone needs to fill it.

A great institute takes a lot of class and a lot of character, year on year, proving again and again under the open sky, that they strive excellence. Newspaper ads can not make a marketing giant leave aside a great institute. The comments from IIPM students talk about jobs they have got....only goes to prove that the fraud have blinded the corporates to some extent. The issue is not superior or inferior, the issue is to find truth and make the transparency prevail, nothing more nothing less. Fascism was not transparent they thrived on illusions and propoganda.....and see what face of shame they showed an netire humanity.IIPM controversy is just a tip of the iceberg, we have hundreds of Engineering collages spread across the country who have a campus smaller than a nursary school, with faculty less qualified to teach a secondary school kids and yet they are able to survive through fake claims and propaganda. May be today this seems trivial but as the seed germinates to form a plant and later a poison ivy it will be the society and the country as a whole that will bear the brunt.

I think IIPM SoM's courses are not ranked by known ranking agencies till yet. The IIPM SoM history is documented in the book called 'The Analyst', released as a souvenir during the inauguration of the school